A Commercial Mortgage Backed Security (CMBS) is a bond or other financial obligation associated with a pool or “portfolio” of mortgage loans secured by commercial assets (e.g., a hotel or office building). A CMBS portfolio is typically divided into a number of different credit rating categories, with certain categories being, by design, less likely to suffer defaults (e.g., a CMBS portfolio may have a less risky “AAA” category and a more risky “AA” category). Each of these credit rating categories is associated with a category size. For example, a CMBS portfolio may have a “AAA” credit rating category with a size of 75% (i.e., 75% of the total portfolio assets are in the “AAA” category), a “AA” category with a size of 15%, and a “A” category with a size of 10%.
Note that different credit rating categories may be associated with a different loan “spreads” representing the difference between an interest rate paid to investors and a known index (e.g., a number of basis points between the interest rate paid to investors and the rate currently associated with, for example, a ten year US treasury note). A less risky credit rating category will generally have a lower loan spread while a more risky category will have a higher loan spread.
Each loan in the CMBS portfolio is also associated with a loan spread, with a higher loan spread indicating a higher profitability of the loan. When creating a CMBS portfolio, the value or profitability of a loan that might be added to the portfolio is often of interest. That is, the loan spread that will be required to produce a desired level of profitability may need to be determined. Because CMBS portfolios can be associated with a significant amount of capital (e.g., $800 MM), an accurate and timely determination of this information is important.
This type of calculation, however, can be very complex (e.g., because different loans that might be added to a CMBS portfolio may effect the overall credit rating category sizes in different ways) and time consuming. Unfortunately, the calculation may need to be performed frequently (e.g., on a daily basis) because some of the variables that effect the relationship between the loan spread and the profitability of the loan constantly change (e.g., treasury rates, investor opinions, and competition in the CMBS market). Moreover, the calculation may need to be performed for a significant number of different property types (e.g., associated with different commercial assets securing additional loans) and risk parameters (e.g., debt service coverage ratio information and loan to value information). All of these factors can make the accurate and timely determination of an appropriate loan spread difficult.